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Reasons behind India's low GDP growth in the current fiscal year!
In the first quarter of the current financial year, Gross Domestic Product (GDP) growth was 8.2%, but in the second quarter it reduced to 7.1%.

The Gross Value Added (GVA) was 6.9% in the second quarter, but it was 8% in the first quarter. The main reason for the low growth in GDP in the second quarter was the low growth in the mining sector.

Average increase in electricity, gas, water supply, utility services, public administration etc. may be treated as other reasons. Core GVA also decreased from 8.6% to 6.6%, which is a sign that the demand for private sector has decreased. As the market is still volatile, we presume that this trend may also continue in the third & fourth quarter. In these circumstances, we can expect less than 7% growth in GDP in the FY19.

The growth in agricultural and allied activities was only 3.8% in the second quarter, which was 2.6% in the same period of last year and 5.3% in the first quarter. This increase is due to increase in allied activities such as livestock related products, forestry; fisheries etc. at a rate of 6.7%. Otherwise, the growth rate of agriculture sector would be even lower. It is notable that crops of other sub-sections including fruits and vegetables, which contribute 45% of the total agriculture sector, increased in the second quarter by just 0.5 percent.

Industry sector grew at the rate of 10.35% in the first quarter, but growth rate dropped to 6.8% in the second quarter due to sluggishness in the mining sector. Apart from this, in the second quarter, the construction and manufacturing sectors were also not remained in the comfort zone. In the second quarter, corporate GVA grew at a rate of 10%, while the share of employee cost was lower in corporate GVA. This is a sign that there is no direct connection between GVA growth and increase in income.

Service GDP grew by 7.5% in the second quarter, which was 7.3% in the first quarter. The reason for the slowdown in the service sector is the recession in the sub-sectors like finance, real estate, business services, Hotel business etc. These items have increased at 6.65% in the previous quarters. The service sector has significantly been an important contributor to the growth of GDP since the past few years. Though, in the last 5 quarters, this sector has been growing at the rate of 6.7% to 7.7%. One important reason for sluggishness in this area is not good business relationship between the US and China.

From the perspective of the producers, the GDP deflator points towards a depressing scenario. However, due to inflation being directly impacted on the economy, economic data may look attractive. GDP deflator also shows the trend of declining prices, which indirectly causes the weak production activities in the economy. 

Role of investment and consumption in terms of GDP:

According to some economists, the relationship between investment and production is not always the same in the business. The advantage of investing in the business is not seen immediately. Similarly, benefit of consumption is not instantly reflected in the growth of GDP. When, we analyze the data after FY 2006, we find interesting results in this regard. Before the financial year 2011, the impact of consumption and investment in GDP growth was seen simultaneously, but after the financial year 2011 the relationship between them was disconnected.

GDP growth was at the highest level during FY12, but the consumption was at the highest level in FY13. Similarly, the investment was at the highest level in FY14, but the growth in GDP reached peak in FY13. In contrast, both consumption and investment were at the highest level in FY 2017. Here, it can be said that contribution of investment & consumption in GDP growth cannot be ensured.

Consumption in the first half of fiscal year 2019 grew at a rate of 7.8 percent, which is 100 bps more than the first half of last financial year. The surge in the manufacturing sector has increased at rate of 8.3 percent.Increase in public investment has accelerated the pace of development. On the import front, compared to the first half of last fiscal, there was an increase of 250 bps in the first half of fiscal year 2019.

Needs to pay attention to rural areas:

The growth rate in the agriculture sector in the last four quarters, wherein first quarter of FY19 is included, growth rate improved, but on the quarter-on-quarter basis, it was down by 3.8 percent due to low rainfall and lower yield of agricultural produce. Low growth in farm credit shows sluggishness in agricultural activities. For example, loan disbursement increased by 11.3% in September, 2018, but this growth rate in agriculture sector was just 5.8%. The rising amount of NPA in the agriculture sector has also affected the development potential of the agricultural sector. In September, 2018, the NPA in the agriculture sector has increased. In view of the elections, some states have adopted the way of debt waiver, from where percent of NPA will further increase.

Growth in agricultural credit distribution and growth of NPA in agriculture sector is certainly a matter of concern. However, the growth of non-food credit has improved considerably in the current financial year, but the increase in food credit is still remains low. In the current financial year, there has been an increase of about 3.2 lakh crore in non-food credit, while in the case of food credit, this growth is just Rs29,500 crore during April to October, 2018. In the month of October, the incremental credit distribution has significantly decreased in comparison to September. Thus, in October, the gross bank credit is only 15% of incremental credit growth in September.

It seems that the work is not being done in accordance with the holistic approach to the development of agriculture sector. There is need to do marketing of crop products.

To support the farmers, the government is presently encouraging farmers' manufacturing organization that is working for the betterment of the farmers, but this is not the panacea of all problems. The government should also make an arrangement, by the help of that the farmers get the proper price for their produce. Farmers are still not able to get the right price for agricultural produce. An income support scheme, which is successfully running in the Telangana, should be implemented in states like Bihar, Assam, Chhattisgarh, Haryana, Punjab, Jharkhand and Uttarakhand, so that farmers can get relief on a wider scale.

About the author: Satish Singh is currently working as Chief Manager in State Bank of India's Economic Research Department, Corporate Centre, Mumbai, and has been writing mainly on financial and banking topics for the last 10 years.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of In case you have a opposing view, please click here to share the same in the comments section.
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